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Dollars Flow Abroad Straight from the Central Bank
// Gold and Currency Reserves Have Melted Away in Record Amounts
The Currency Market
The Central Bank announced yesterday that Russia's gold and currency reserves decreased by nearly $3 billion in March, the largest monthly decrease since August 1998. The reasons for this record decline are the exact opposite of those that caused the drop in reserves six years ago. The Bank of Russia's tough policy, which has hampered the strengthening of the ruble, and the rise in the dollar on the foreign market have led to increased demand for the American currency. This has freed the Central Bank from the need to build up gold and currency reserves and the money supply.
Based on information posted yesterday on the Bank of Russia's site, gold and currency reserves decreased by $2.92 billion in March, from $86.318 billion to $83.398 billion. This is a decrease of only 3.38%, which is not very impressive in relative terms; however, this is the largest absolute decrease in gold and currency reserves in one month since the memorable month of August 1998. Back then reserves fell $5.95 billion, from $18.409 billion to $12.459 billion. This was a real tragedy, since the drop amounted to 32% of the reserve volume and was accompanied by a landslide devaluation of the ruble.
This time the market situation is almost the exact reverse. “Before February, all the banks were sitting in short American currency positions; everyone was selling dollars, even those who didn't have any, because they were sure that the Central Bank would continue its policy of strengthening the ruble,” said Sergei Romanchuk, head of the conversion department at Metallinvest Bank. “However, the Bank of Russia managed to overcome this trend and the banks were forced to close their short positions.”
Simultaneously, the dollar finally began to strengthen on the world market. And according to Roman Kosenko, a currency dealer at Neftyanoi Bank, the Russian market began to react more to the foreign market situation. “In January and February, the dollar to euro rate had no impact on us at all, since the banks sold dollars and bought euros in anticipation of an increase,” he explained. “Now it's just the opposite; the dollar is rising and everyone's buying it.”
The result was that the banks began a massive buyup of the dollars flowing into Russia. However, there were not enough of them at first, and at the beginning of March, the Central Bank had to put up more than $1 billion in order to stabilize the situation on the currency market somewhat. This led to the first sharp drop in gold and currency reserves (see Kommersant of March 4).
By the middle of the month, the situation had reached the point where the Central Bank was effectively not buying anything on the market. However, foreign debts had to be paid off. According to information from the Ministry of Finance, more than $2.5 billion was needed in March to service the debt. The weakening of the euro also led to a revaluation of part of the gold and currency reserves. All of this put together caused the record decrease of $2.92 billion.
However, the Central Bank is probably not very disturbed about this right now. The Bank of Russia's priority task in recent years has been to control inflation and limit exchange rate fluctuations, and not to build up gold and currency reserves. Central Bank chairman Sergei Ignatiev promised at a meeting with Vladimir Putin that the national currency would strengthen by 3–5% in real terms over the year, but this plan is obviously being overfulfilled at present.
Thus it is not inconceivable that after a time the Central Bank will have to start buying dollars again in order to raise the rate of the American currency. And this will lead to a new increase in gold and currency reserves. If, of course, the figures for the strengthening of the ruble the Central Bank chairman reported to the president were part of a plan and not simply noncommittal estimates. For now, though, the situation on the world currency market is speculating on it anyway.
Of course, it's hard to say how long this unstable equilibrium will last. “The situation with inflation is stable, so the rate of the dollar against the euro and other world currencies has the greatest influence on our market. However they change, our market will react in the same way,” Sergei Romanchuk believes.
Kommersant will be following the development of events.
Pavel Prezhentsev
All the Article in Russian as of Apr. 08, 2004
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Photo: Pavel Smertin